Q1 2020 Earnings Call
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This call is being recorded on Thursday September 12, 2019, I would now like turn the conference over to Katy Perry talked in Investor Relations. Please go ahead.
Yeah. Good afternoon, and thank you all for joining us for our first quarter conference call.
Today, we will provide summary comments on our results and give you an insight on the impact the new I first 16 leasing standard has on I'm sure. We will leave as much time it becomes a question.
This call is being recorded and the audio recording will be available on the company's website [laughter] docs yet.
There's a short summary document outlining the place of our corner available on our website.
Joining me on the call. This afternoon are like on my mind, President and Chief Executive Officer, Michael Miller, Chief Financial Officer, and here. They are all chief operating officer faltering.
Today's discussion May include forward looking statements, we caution that such statements are based on managements assumptions and beliefs.
And are subject to uncertainties and other factors that could cause actual results to differ materially I refer you to our news release and everyday for more information on these assumptions factor I will now turn the call over to Michael My mind.
Thanks, Karen and good afternoon, everyone.
Oh, we're again pleased with our results this quarter. Our momentum continues sunrise costs are coming out of the business. The team is executing more sharply our strategic initiatives are all progressing well and we continue to improve our EBITDA margin.
Other than the first accounting changes it was a pretty clean and straightforward quarter.
Yeah, first 49 cents, a quarter 12 cents higher than last year, and if you remove a few one time impacts from last year. One in this Q1, it would be more than a 75% improvement.
Sales were up in all regions and across all banners and it's still early days, but we are pleased with the sales where you're seeing from our seven fresco stores in the west.
Oh Boy continues to post excellent sales.
Same store sales were 2.4%.
The customer count and basket size both up.
We have a lot of the health care reform impacts last year, which rendered the impact of pharmacy same store sales immaterial this quarter.
Internal inflation was approximately 3%.
We saw a different tonnage for the slow start to summer weather wise, notably in may not appear to impact the whole market, especially in eastern and Western Canada temperatures were nowhere near seasonal norms and affected summer seasonal categories like cold beverages ice cream condiments and summer fruit.
Okay, and then just commonly used as an indicator of market share internally, we have several different data points that we used to look at market share a more granular level based on these additional data points, we held our market share at least steady this quarter, even without counting are far more acquisition market share gains. So all in all I thought our team did a good job on comps as you can see from our margins. We didnt buy sales in fact, we were purposely a little less promotional this summer as our promotions continue to become more effective.
Yes, our customers are great experience or the more relevant offer provides a good lift for us and reduces the amount of money we spend on promotions.
Gross margin rate was up 120 basis points from Q1 last year category resets continue to expand our margin as anticipated.
And on top of that normal operational margin management fire merchant team was very good.
This is our first quarter reporting their first 16, it's created some noise that Mike will explain.
I will note that our Premier first 16 EBITDA margin pre it first.
Increased 60 basis points over Q1 last year, that's apples to apples.
We continue to close the gap on our competitors.
As we greatly improve execution and continue to unlock empires cash generating potential we believe that it is imperative to return cash to our shareholders last quarter, we increased our dividend and then after we wouldnt be repurchasing shares this quarter, we repurchased about 550000 shares for approximately $19 million and we remain committed to our 100 million dollar target first fiscal 2020.
We continue to make good progress against our major cities strategic initiatives. We are in the final year of our Sunrise transformation and this initiative is progressing even better than we originally anticipated.
Remained remain on track to achieve a savings target of at least $550 million $50 million more than what we originally announced over two years ago.
In store execution of category resets, which will drive a large portion of our total sunrise savings is nearly complete.
Our teammates and our stores have done a great job realigning our stores try to fight troche, assuring ourselves or stock for the items customers want most.
All of our reporting and customer feedback to date indicates that in store execution of response has been very well received.
We continue to expand our fresco banner in the west and to date have opened five stores in British Columbia. According to ethnic oriented Shiloh fresh go stores and another two stores and when a peg.
We're pleased with how the stores are performing and that our customers are excited our marketing team has done a great job driving awareness and we'll continue building the fresh Colm ran in the west.
Our fashion a fresh start in the west allows us to participate in the growing discount segments by converting 25% of our poor performing Safeway and Sobi stores to fresh go stores in markets that are better suited to discount.
We remain on track to open 11 additional fresh go stores throughout the remainder of fiscal 2020.
Our strategy to grow share in Ontario, where we have historically had a low market share continues to progress well.
We are seeing stronger results at our existing Sobi fresh growing food land banners and we continue to see improved sales and customer metrics as we can for all fresh go stores to the new fresco 2.0 model.
Our acquisition of farm boy It gives us a winning format that will allow us to accelerate our growth in urban and suburban markets and Ontario.
Far more has been part of the Empire family for just over 10 months now and continues to build on its industry, leading operational and customer metrics.
The team at farming is making progress against our plan to double the size of the business in the next five years.
We currently have concrete plans to open another three far more stores in fiscal 2020 and two in the first quarter fiscal 2021 far boards access to our Empire real estate progress has allowed us to accelerate development of farm boy in high quality locations.
Well off our game changing E Commerce solution will also position us to accelerate our growth in the GI falloff is on track to rollout testing a soft launch in the GCA in late spring.
Our second CSC in Montreal, which will serve major cities in Quebec, and the Ottawa area is expected to open in 2021.
You know winning the next generation of retail will require both extraordinary execution and smart strategic innovation.
In parallel with the strategic initiatives, we have underway, we are positioning the company to innovate for the long term.
Alright, Grover our new SVP of innovation that strategy will join our executive team at the end of the month.
Well elevates the importance of data analytics in AI and drive innovation initiatives across the company.
We are focused on putting in place the leading teams tools and culture.
But we need to drive innovation in our business and to win the next generation of grocery retailing.
We are extremely pleased with the momentum we are seeing in our business. We are more customer oriented more innovative and definitely more focused on execution.
We are hard at work on finalizing our strategy detailed road map and financial goals for the three years post Sunrise to ensure this momentum continues we see a lot of runway ahead of us and with that over to Mike.
Thank you Michael.
Good afternoon, everyone.
As Michael said, we're pleased with our margin performance this quarter as margin dollars increased again due to higher sales and more importantly, an increase in margin rate.
Hundreds of 120 basis points.
The two main drivers of this margin rate expansion were category recent benefits.
And the inclusion of falling away, which has a higher margin rate than the rest of the business.
If we made a normalized for mix effects of higher sales in lower margin businesses like Quebec wholesale impact would be even higher.
Sales were positively impacted this quarter.
By the inclusion of fanboy and inflation.
Fred you, specifically was a big driver of prices and sales during the quarter.
Weather and increased costs increased prices and also lowered the amount of units available to slip for sale.
Excluding project on an apples to apples basis comparison.
Which was marginally positive.
[noise] consistent with last year sales force variable SJ expenses up mostly in store labor.
As you know as a percent of sales after removing the impact of buyer for 16 was 50 basis points higher than last year.
This was due to the inclusion on farm voice higher labor cost model impact.
Nonrecurring impairment reversals in the prior year and the closure costs associated with the announcement of 10, new fresco locations and conversion of two of our own stores to new far more stores.
These costs amounted to $21 million before tax related to severance inventory and asset write downs or about six cents per share after tax.
These costs are in addition to the $10 million, we recorded in the third quarter of fiscal 2019 aligned with out West discounts expansion plan to open 10 to 15 fresco locations per year.
Over the next three years.
Project Sunrise is on track and we continue to estimate incremental savings of about $250 million in fiscal 2020 spread evenly across the year.
We continue to be on track with about 25% of the incremental benefits recognized in this quarter.
That's roughly 80% gross margin trend, 20% yesterday.
These savings come largely from category resets indirect sourcing cost reductions and store improvements.
Equity earnings decreased over the prior year, primarily due to a prior year disposal properties by Crombie has increased our share of the earnings last year by approximately two cents per share after tax.
As a reminder, crombie has announced a significant sale transaction that will occur in may.
Thank you that will positively impact our second quarter 2020 results.
The effective income tax rate for the quarter was 25.6% to 26.5% and we continue to estimate excluding the impact of any unusual transactions when differential tax rates on property sales the effective tax rate for fiscal 2020 will be between 26 and 28%.
Free cash flow continues to be strong at $224.2 million this quarter reflective of increased earnings.
The strength of our cash flows has enabled us to reinvest back into the business in a disciplined manner.
Positively impacting our customers' in store and enabling better technology and processes in our back offices.
In the first quarter, we touched all 50 stores through renovation redevelopment or conversion.
Our strong cash flows sustainable margin improvements and improving credit metrics were a factor in the decision by DBRS to upgrade some of these credit rating to triple B low with a stable trend and for S&P upgrade sobi outlook from stable to positive.
Hi, first 16 was adopted for the first time this quarter.
You'll notice several changes in our external documents specifically you can see the impact on key metrics on page 713, 17 and aging of the Mdna.
Our documents reinforce that this is an accounting and measurement change only and it had no impact on our cash generating ability.
We have provided an outline of the extent of the change on each of our key metrics on page two of the press release and page seven of the Mdna.
A few key metrics to highlight your appetite.
EBITDA margin and free cash flow.
EBITDA increased by $129 million, mostly due to the removal of rent expense, which was replaced as depreciation expense has net finance expenses.
Neither of which are captured in this metric.
EBITDA margin as we reported was 6.8% for the quarter pre art for 16, it would have been 4.9% an improvement of 60 basis points over the prior year.
The free cash flow definition has been updated to ensure comparability with the prior year.
We will continue to show you the quarterly impact on fire for 16 for the remainder of fiscal 2020, as we start to get used to the new metrics, which will now be the new normal for the Canadian industry.
Although we will of course continue to metrics that are inconsistent with U.S. peers, who report under us GAAP.
The first quarter with solid we're off to a good start.
The team feels confident about our past agenda for this year that includes the completion of Sunrise.
The continuation of the fresh count expansion in the west.
Increasing fanboys footprint, and Ontario, and launching followed by Sotheby's.
And with that I'll hand, the call back to Katie for questions.
Thank you Mike I know you May open the line for questions at this time.
Thank you.
And gentlemen, we will now begin the question and answer session.
So do you have a question. Please press the star followed by the one on your Touchtone phone you well here with me Tom Panos acknowledging everquest.
If you are using a speakerphone please lift the handset before any teeth.
And your first question is from Karen short from Barclays. Please go ahead.
I wanted to just ask about the cadence of audits.
Throughout the quarter, excluding produce and obviously I asked because weather had an impact. So wondering if you could give a little color. There and then I had a couple of other questions.
Sure the three periods.
The first was a.
Was it was the weaker as the.
I'm, just trying to get going.
And and progressively improve through the next the next to the next few months.
So it includes so once we got to the final month, you would have been much more positive not just marginally for the entire quarter tonnage.
Well more positive.
Relatively speaking as Michael said.
We had a slightly lighter promotions.
Joel this year so.
Yes, we were.
If you had to pick one of the two metrics I'll handle more focused on margin.
And then then growing growing tonnage in sales.
Okay, and then I guess, just curious in terms of the competitive landscape in light of the hyperinflation because it sounds like that's continuing into the second quarter.
As the environment change at all in the second quarter.
From a competitive perspective.
We don't anticipate big changes, except if we have some commodity seeing bigger inflation. So when inflation is.
Double digit in some commodity then we can see some change in trends.
But in general I think is pretty stable quarter after quarter end demand of inflation in produce so no we won't anticipate a change going forward.
Okay, and then any way to quantify the impact as farm boy and also produce on gross margins.
[noise] Photonblade is.
I know, it's obviously positive it just yet.
Our operating model is is because of the mix.
In their business runs at a higher margin rate.
We have not disclosed the exact basis points.
Yes. It is.
Competitive.
But they also running a lot higher SJ percentage.
All told at the bottom line.
Their EBITDA percentage on an apples to apples basis would be higher than the unconsolidated. So these numbers.
Okay, and then last question for me on data analytics.
Would you be willing to just give a little color on how your approach might change going forward on the analytics front.
Yes, Michael.
That's a word.
But we're not going to get over zealous on it.
We're going to have.
We're going to take it in stride and key on some very important big prizes, especially on the merchandising side behind the scenes and personalization on the.
On the front.
Any more than that I'd, rather not give to you, but I can tell you that we're going to.
Keep the team small and focused and on the big prizes not not spread ourselves too thin on this.
Okay, great. Thank you.
Thank you. Your next question is from the Shah Suite <unk> from National Bank. Please go ahead.
Hi, Thanks for taking my questions I'm wondering if you could provide any early color on.
Projects Sunrise to Plano, if there's any comments you can share and if you can maybe you can help us on when you might share some of the details on that.
Hi, how you doing the salads.
It's Michael.
And we're working through the strategy right now.
Our intention this time is to share.
What we can with you and as you know we try to share as much as we can be transparent in the spring having chosen when in the spring to share that we're still working on it.
But I can tell you that we're not just beginning this work where we're right in the middle of it and we're going to have very aggressive goals to grow our year over year earnings numbers. As we go forward I don't think I don't want anybody to think we're going to take a holiday after sunrise.
Sunrise 2.0, and that's how we're going to be cost will be aggressive.
Okay.
[noise] Empire has has implemented a lot of change in a short period of time and I know you guys a lot more initiatives planned and youve given us insight into some of them.
But just wondering as you look at the organization today from when you come in.
Would you say that the.
Restructuring is effectively complete at this stage and you.
You can pull a lever and I understand how the kind of the organization will respond to you are you or is there still a higher degree of uncertainty associated with let's say a company thats running on a normal basis.
It's it's night and day.
As I said in the aging GM speech, which I would guess most you can since year to date I guess, you've got better things to do and you're busy to hear my speech is as I said, we plan to rock solid Foundation now.
This company can execute and operate and take on more and more projects and people have accountability.
The team that structure works, probably doing it off.
I'll be a little bit Michel will get a little tweaking below the executive level to make sure. It works really really well across our different functions.
We've got the people in place are working well together.
I I mean, you've been a little surprised that this team is operating at such a high level.
At this point I would have thought probably we might be six or 12 months ahead of where we would have thought two and half years ago that doesn't mean that.
We don't have work to do we do and that people are settling into their no new portfolios.
There is.
Okay keeps getting better I don't know, where I went up because I can't give you much more than this for that that will be leaving right away, but he is.
He is just doing a great job in terms of taking on Qubec, and then merchandising and operations and how we work with finance and marketing across the whole company, so couldn't be happier with the structure and the and the people and when we when we call when we pull the rope. It works like you guys as you were asking.
Okay. Thanks for that color.
And then.
Just wondering.
From a from a consumer standpoint.
A little bit more concern out there than than usual just wondering what you're seeing and if you are seeing.
Well thats, certainly macro headlines that permeate into the customer.
Yeah, I think I'll start and then compared closer to.
To sum up some of that that I am because of its operational and merchandising perspective, but.
No. We're not we're not seeing anything as of this point out in the market that would indicate consumer malaise or overweight.
Thank everyone out there we're concerned about some of the things we're seeing on the horizon that we certainly we certainly hope that they're there won't be a recession, because I kept cost people jobs same time grocery performs awfully well in recessionary periods, but it's not as good but we'd rather than economy was doing well.
Well, we're not seeing much and Pierre maybe you could give a little bit more color or this year.
Oh, I think consumer looking trying to remain the same.
You meeting stuff like we knew.
We need to be more rather than.
The society's changing have less time everything's on that thing.
Big trends continue.
19, we anticipate no major changes going forward except.
Some economic changes, but once again.
In difficult times, it's always an opportunity to differentiate our self and we are ready for it.
Thanks for the color.
Thank you. Your next question is from Irene Nattel from RBC capital markets. Please go ahead.
Thanks, Doug good afternoon, everyone.
Just on the category resets just wondering.
Time goes on how are you seeing performance evolve our mature of some of the early categories that you did versus the later ones and as you've taken all those learnings do you think that you need to kind of go back and do any many resets of the early categories.
Okay, Great I think.
I think the short answer is no.
Because.
We went through.
Very rigorous and very identical process for all of the Rollouts.
And including.
Every category that gets rolled out goes through pilots weren't approach as part of its cycle.
And as we got into the stores.
We of course look better and learn.
From each successive week and anything that we felt could have been improved.
In the early categories would already have been executed.
From a negotiations perspective that was done in a in a very compressed timeframe and a number of very tightly controlled waves were very satisfied with the outcomes and and those are being executed as expected.
So as we move forward next year post Sunrise.
I think we've said pretty consistently that.
We did a lot in a short period of time.
With with a new team and now under appears leadership and more miles in the saddle.
It is clearly going to be more fine tuning and opportunities in all of our category management and we expect to capture that as we move forward post Sunrise and it's more business as usual we are actually.
Very satisfied with the quality of execution.
And just maybe I'll just add two things such as we were.
I think we've been really pleasantly surprised with the three work we did in terms of understanding the customer and.
And what to do in each category and what products would resonate the most.
We seem to merchants.
Pretty well nailed that.
Very very few changes after we put the category resets and I can't think of one off my head because they're so few.
The second is Mike's right that once we're done categories that we got to go in and find more optimization and I think a lot of that will come from the data analytics and AI that appears working on right now.
That's great that's really helpful and I guess that sort of brings me to my next question, which is.
If you think about you know whatever whatever you decide to go and I know project daylight.
Well, what do you think.
Key elements that you see now that you know you really really we'd like to get that in the next three year plans.
We're still working on it but I think it's I think it's clear you guys can do the math that we've closed the SDMA gap quite a bit on our two major competitors and we have a long way to go and so we've got a little bit to go on that not too much but we'll get out that and.
I think that we have a large price on cost of goods sold even now.
Even with all the work regarding the progress we've had and the third piece that we're looking at is is is is having more productivity in store and getting that sales per square foot up.
When we look at our gap to being best in class in the country. It's it's mostly going to be a combination of Cogs.
And sales per square feet, all of but it's not.
But it's not without plans I think we can go and improve those sales per square feet against our competitors and it varies from smart fashion, while taking on some of the costs. So we've got some more work to do.
In terms of the roadmap in which order, we're going to tackle it and make sure resources of Aaron.
And we don't overspend, because we are going back to the old days.
So that's that's what we're doing but the prices there I think it's it's a matter now of prioritizing.
Putting our financial goals clearly in front of US and then having a just a roadmap.
Im a simple person.
When something works, we go back to it I think that we can.
Why sometimes I refer to it as projects on Sunrise 2.0, we couldn't do everything in a three year period, just couldn't do it.
We had to get the infrastructure industry and the people in place and the cadence in the process now we can go lets go finished the job and I think thats what the next three years will be.
And just a final question leading onto that.
Do you see any need from us or a technology perspective, do you see any need to just strengthen the platform do any significant investments there or you are okay for now.
Well the answer the question in absolutes.
I think the short answer is.
Over the long answer is.
Is that our systems are.
Our stable and.
And they produce the answers to a large extent that you asked them to do.
But it's it's whether it's with some difficulty and they're not as nimble and and his focus towards robust data and analytics as you'd expect from a company of our size and complexity.
So.
We will be investing more and for sure at higher levels than than what the company has seen over the last three or four years ago.
But it's not going to be directed at changing the basic infrastructure as much as adding new capabilities such as.
Artificial intelligence analytics capabilities.
Loyalty personalization.
Much better data arrays, so that merchants can rely on the data and see it on their desktops.
As opposed to having it.
Put together on a periodic basis by finance people.
So.
Of exciting investments.
Executed over a period of years, but that really focused on the insatiable.
Requests and desires of our merchants and others for better analytics and better insights.
That's great and helpful. Thank you.
Thank you. Your next question is from Mike Koban from TD Securities. Please go ahead.
Add on.
On the rollout program that launching in this brand next spring.
So you're talking about a soft launch our test launch in late spring when would you expect full complete rollout in the DTA.
Hi, Michael Great question.
What we said in the past is.
You got it right before you go to a large group of customers so difficult to call. Our we don't think that test and soft launch should go for too long a period of time.
But we're going to we'll if we're not happy with how we're we're progressing and we expect to be happy then we'll.
Then, we'll we'll slow it down kind of tiny bit and rollout, but we're going to roll it out political by postal code anyway. So what we put in our plans and they've always been there from since the very beginning axis.
So it's actually the good work that Sarah as leading is going really really well right. Now is is that spring pass this offline.
My experience and if you go when you are ready because you've got one chance to knock the cover off the ball and throw the customer and take the eyeballs are no falls in this case.
And and Thats, what were going to do so I don't want to commit to anything other than when we go to customers. This is going to knock your socks off but that.
Everything's looking good so far Michael but once you figure it out and you say, okay. The test off launch has gone exactly how you're expecting you've got it nailed how long does it take to rollout postal code by postal code.
It will take it will take a few months.
And.
The fresh go in Western Canada is any way you could give us an idea of the relative performance to either the fresh goes in eastern Canada, or in Ontario, sorry, or or the fresh stores in western Europe .
Canada.
Sure.
[noise], it's it's a little different different by market as we've rolled out.
But our investment has been a fairly significant in marketing and promotions to make sure that we we set the right.
Price.
Impact in customers minds, there's clearly been some competitive response, having said that the sales that we've seen.
Across the system.
Our in fact higher than the Safeway stores.
Which they replaced pre pre opening so we've been we've been very pleased about that because it. It does mean that we've attracted new customers.
And and in addition to that the does the conventional stores that we have in those market areas continue to do well as well so weve.
Weve clearly generated net new sales for the company, which was which was one of our goals.
From a profitability perspective.
I would venture to say that it's at this stage roughly neutral.
Mostly because it so it's a relatively small number of stores and.
And.
And we Didnt expect to obviously to be accretive.
In the early days so.
So so from the Wesson perspective.
Lower margins, because we're ramping up.
Our our people we have more trading we have more people in the stores as they get more effective and more efficient and understand how to run a discount store, we will see those costs coming down.
Our promotional intensity.
As we start to get a little more mature with us already starting to lessen.
And we expect to see steadily increasing margins in India in the banner.
In terms of your your question on the on the Ontario values, our sales continued to be very strong.
In our discount business very satisfied with them the new formats.
The freight fresco 2.0 and continues to do well and and we're we've I think we've I think we've rolled it out to something like 45 stores to date.
Im very satisfied with the outcomes our franchisees are happy.
So clearly 32 different markets, Michael one to start up in ones and ones a mature market with some some new concepts being rolled out.
Obviously, the profitability in the Ontario market is higher than the west at this point.
Okay, and the the rollout in Western Canada to the 65 stores or so you expect to have that done by the end of fiscal 2000 Q is at the time.
Yeah, we're we're saying over the next three years, so I'd say fiscal 22 early into the next year. It's.
That's the current plan.
And and so far we've we've we've kept to the cadence that we anticipated.
We don't see anything at this stage that should slow us down so.
So that I think that would be a reasonable estimate.
Okay. Thank you.
Thank you. Your next question is from participating from Scotiabank. Please go ahead.
Thank you very much for taking my question Michael in your opening remarks, you referenced the fact that the teams are executing.
More sharply and certainly that's showing up in the numbers that you can actually see it when you go to the stores and one area that you referenced here in discussion at the gross margin wasnt promotional effectiveness and I'd really like you to talk about that if you don't mind, a little bit more.
Where are you in the journey of trying to drive better promotional effectiveness. When did you start are you looking at promotional effectiveness now more through a return lands' end requiring that the promotions meat.
Basic return hurdles and if so if you are doing it that way is that a change in your approach and I'm assuming that the the that the size of the prize of getting you know to the optimal proposal promotional effectiveness is pretty big free ride.
Please standby, we get the presenters back on the line.
Yes.
Yeah.
[noise].
[noise] [noise].
[noise].
[laughter]. Thank you you may now with him. So you may ask the question again.
Okay.
Right now we're in Nova Scotia, but I don't think we can blame the hurricane butter line suddenly went down and wasn't because I was nervous about your question I don't think Patricia Bella Terra neither neither.
Michael Okay sorry.
So Ryan its a long one and I apologize to anybody who has to listen to it again, but I was so in your opening remarks, you talked about the fact that the team.
The teams are executing more sharply and you can see that in the numbers you can see that if you if you walk the stores and in one area.
Which showed up in this quarter you reference didnt discussion of gross margins on promotional effectiveness and so I would really like to talk about that a little bit more maybe talk about where you are on that journey. When did you really seriously start to get to do the work on promotional effectiveness.
And Additionally are you now looking at promotional effectiveness through a return.
Mirror and requiring that promotions actually meet some return hurdle and if that's the case is that a new approach.
So not a new approach.
While we while we changed our structure and many merchants and all of this supporting teams.
Well wishers just equally important.
Ended up a new categories.
A large job to do three sunrise.
At the same time, we still have many very experienced and very capable merchants, who are running complex categories across the country and.
And on an individual and collective basis.
Hey, they know what they're doing.
They they understand the necessity to balance margin sales and certainly Michaels very clear directive coming in over two years ago was margin counts and really counts because that will be put on the bottom line and and we need to get hold discipline. When his you get more focused on making sure that we're making smart decisions.
And then that that message has been reinforced by appear as as he has taken over more and more responsibility and now now basically controls.
The merchandising decisions across the entire country except for.
Farm boy and discount.
And so so I'd say no its not new.
But what's changed now is that we are really through the Sunrise rollouts.
The merchants have access to better tools and analytics and they did two years ago.
We have.
Yes, they are solidified into a new team was.
With a strong leader.
And.
And we are turning our our eyes towards more maybe day to day category management and balancing that said sales margin equation at the same time as we've referred to previously we are investing quite heavily in new analytics and new data models.
To up our game in terms of measuring and then ultimately helping us with the execution of promotional effectiveness. So it's I guess, what I'm trying to say is that has been a progression.
There is not a sudden sea change, but as sunrise progressed as matures completes.
We we just have we have more material and more tools to deal with and and we're going to get.
Ever better on promotions I don't appear if there's anything you want to add to that.
Very well said the only other thing I would like to have is.
Add to CAGR receptive to their size.
Gave is very good knowledge.
Every single category tumor region.
So I think to add an better ownership and understanding of the agree.
Single category or SKU of the App to Endo.
In there from a planning and.
And I guess, Mike has said a year ago, we were more focused on structural change and now we will focus on day to day business. So that help with the good guidelines. The theme is more focus and more disciplined than ever and.
I think.
There's still room for improvement for sure but.
Compared to Q1 last year.
The balance between sales growth and margin expansion.
Is is a great success in only 12 mountains. So if you compare to last year Q1 than now.
I would like to congratulate the team if that's where the big change structurally and now that you are more focused on the day to day business.
That's very very helpful. PR and just on the category resets you said that you're almost complete so will that be completed in Q2.
Finally, complete probably close to Q3, but but by the time when we get out of Q2 were substantial certainly Don in terms of the store road.
Okay, and just Michael you mentioned the Hurricanes just curious did you.
Have.
Now some store closures and the hurricane and were you able to quickly get merchandise back on the shelves because I understand there was certainly a lot of 'em up people.
Party hoarding product before before the the Saturday.
Yes, I mean, I would say we are theres got wiped out in the two preceding days, especially at Halifax, Pickle County, all up and down where they where the I was going to hit our customers came to us because they need to get things and we were there for them. We did a really good job of pre stocking those stores carry more water and other items that are essential and they'll say certain situations.
The answer is yes that many of our stores were closed some for a short period time some for longer Gordon news is very little structural damage to the stores. So that it shouldn't have any ongoing.
Impact on us.
To restock stores that ever.
Essentially sold out in many many categories takes some days although.
Our supply chain and operators throughout beginning during or after have been sensational. Although we saw a lot of the beginning I think it hurts your actually on the backend to that.
Because of some of the closures and try to restock all the products back in the stores, but all in all I think compared to a lot of people we came through unscathed.
Okay. That's fantastic good to hear thanks, Michael.
Thank you. Your next question is from Peter Sklar from BMO capital markets. Please go ahead.
A question on inflation you're quarter you just reported was really facilitate you had a good 3% tailwind from inflation just wondering now that you're halfway through the second quarter.
I assume youre seeing that level of.
Inflation decelerating somewhat or is there anything you can comment about that.
I'm not sure I would say that's hard to say it's decelerating.
At this point is its early maybe fairly consistent I would say, but turning to tell when the quarter is good I wonder.
Okay.
And then Michael I had a question for you.
In terms of your brand positioning of our brand messaging of Sobeys in Ontario.
I thought I detected a subtle shift on how you're positioning of how you're positioning the brand and like for example, I noticed the gone fishing advertisement that are a little bit different than whats Sobi says typically down I'm. Just wondering have you subtly shifted the brand messaging and was that based on I know you did some consumer research and.
Terms of trying to understand who sold these customers.
Yes, I think you picked up you picked up on a great point and.
I mean.
The brand as the brand.
And you make changes to it.
When we did the customer research we.
Underlying love a lot of Canadian for the Soviet Brad.
Was there we add and what we were trying to do is cover.
I'd say compared to almost any brand I've ever seen the level of support.
How they think Sotheby's as.
Family tied to grocery store or the place and and what we weren't doing.
And we're doing now is we're executing better and living up to some of that brand reputation, but we're also tell us we're really.
[noise] honing in on that message resonates better with our customers as really what Soviet stands for so I'd say that when you see I think that fishing and I wouldn't I wouldn't pointed that out is absolutely emblematic of what we're going for and the Sandra and the marketing team working with the other executives.
I think it's really now with the brands stand for and what we're going to stand for great customer feedback on all the measurements to deal with that but as you also see much as many of the things that we're going to do in terms of marketing and sponsorship.
Community activities.
Are going to be.
Resonate better with Sobi is at the same time, we're also doing well actually Sandra and her team are doing a lot of work on on the brand messaging for Safeway and for Thrifty.
And for food land and so I think we're a little further ahead on the Soviets, but not too far behind on the other banner. So that was I'm glad to hear that you noticed.
Okay. Thank you for your comments.
Thank you.
Your next question comes from Michael countries from CBC. Please go ahead.
Hi, good afternoon.
I just want to ask about farm boy.
And just regarding the conversion of other banner locations can you talk about the size of the locations you're comfortable putting a farm boy in and how the model can adapt as you push presumably push the store size higher overtime I understand the recent announcement was a fresh go live presumably there are larger sobi is locations that will be.
Really well suited to a to a farm boy concept.
You don't the answer on that one is interesting mark if the.
The format.
You know has.
Until recently.
Ben.
In very small footprint such as the one in the retail center and onward, which is which is the smallest one.
You know to 2020 830000 feet.
At the top end, but.
We are looking at some new.
Stores.
Including one in auto.
Which is going to test the upper limits on that block size and look at and look at putting some new and innovative.
Ideas into a little more square squared square footage.
On the great thing about the concept is that it is very flexible you are the mix stays the same but the flexibility of the fixtures in the layout.
Is such that it it does fit into these very successful in a wide range of a floor plates.
So unlike us if we are assuming these refresh go we don't have them as tight a range for for for where how that format would work as you might think.
The only thing I'd add before anyone jumps on me these were generally and Jeff ideas to go into the and try.
Deferred.
Sized format, which they think they can really execute upon but keep that fantastic brand and everything we are trying to do there I think that.
If they were on the call jail, and Jeff would tell you that.
Prowess of our of our real estate team and.
And some of that what we had I mean, there's one at young at Eglin, Tim is going to be a far more I think everyone knows that probably already that was going to be a sobi as weve it'll be a little larger than prototype a far more.
But they are going to.
I think its thats, just situated better to be a farm boy store in that area and we're seeing all sorts of opportunities, but these are being driven by jail and Jeff.
Directing.
The work and the decision, making in terms of what theyre comfortable with to make sure. They can be even greater than they have been before but working with.
With our real estate group and our executives.
It's working real well.
Okay. Thanks for that.
With regard.
With that with regard to this gionee could you just talk about how you sort of think about the longer term or at least through the course of fiscal 2020 sort of growth rate and that's you know obviously there is no shortage of areas, where you do want to spend particularly on the brand awareness side across banners as you as you as you commented.
And you know fresh go west and voila overtime, so does that sort of require a pickup in spending or consuming more of the sunrise savings or do you have the ability to shift spending from other parts of the business and sort of keep on the current current run rate.
I don't think I would walk away with an assumption that we have to ramp up question any spend.
So.
Yes, if you take out the impacts homeaway.
The.
The distortion of the last year.
One one time positive we had in our numbers.
And the closure costs.
This quarter.
We.
I'd say that on an ongoing basis, what are going to continue to be very focused on cost control and I think it would be wrong to say that we anticipate a significant ramp up.
Yes, you know activity, you'll spend to support what we want to get done.
As Michael said, we still actually think we have.
Some more opportunity in some more capability to close unless you dig up not quite as much as we do in the in the Big line on Cogs in sales.
So I think you can expect us to continue to be very very focused on becoming more efficient on that line and not less so as the year progresses.
Okay, and then you sort of answered. This this question I guess in a few different ways, but I just wanted to ask it specifically about sort of the regional structure and then the shift of merchandising functions into different offices, I guess that was sort of you know a year and a half ago now really but looking back on it now is there anything you would do differently and what sort of learnings have you pulled from that experience either sort of suggesting future opportunity or or things that you want to kind of de risk.
I think too we did get a reset things there are sites, we worked together all format.
All region together.
We remain.
Mainly we have our.
Grocery team orientalist and those that are done the fresh team in intermodal.
Well I mean, we remain the T., we keep the we kept the team in Qubec.
And now we are more focusing on format and so we have merchandizing people across the country.
To be close to customer needs, which is a good thing.
And but that the team is working together because the AD to execute reset together so no.
Resets is over.
But reviewing category that will be a continuous thing that it's in our processes now and we have a national governance for all format on region.
Ah So we learn from we took the best in the.
We love the worse.
So we're working together we are focused on new regional needs and we kept the best people across the country. So honestly. It says the best of two worlds and we leveraging the size of the company and will remain close to customers.
Okay. Thank you appreciate all the comments are from.
Thank you. Your next question is from Keith Howlett from Desjardins. Please go ahead.
Oh, Yes, I Wonder if you could update us on your work on private label.
[noise].
To me earlier update on private label.
Oh yeah.
We review.
The Brent the branding dead in the look and feel of the brand I think we you saw some new.
Look and feel of the new complement a logo and everything I think the new logo with we fit better in our shelf. It would be a we have a better view on these products and our shelf is the goal beyond that.
And the best thing is to get your reset.
We revised every single category specific role for our private label in some category private label with Lee a specific role in another different world.
And so I think it's the bigger thing we did were done last year and we seeing already.
Positive result.
By having.
I would say stronger joint business plan between our our national branded or private label and private label.
Going forward specific role to play in the category. So.
Yes, Thats, where we are.
The the Newell the new image will be.
Finished by the end of this fiscal year.
So its a plan or it's already started and we finish it said.
35.
Andre and product that we need to redesign the packaging and everything.
Plus a couple of new new product for sure.
And I just was wondering on on the square footage in terms of.
The doubling of farm boy over the next five years, how do you anticipate that will break down between conversions of existing.
So these are.
Fresh go real estate versus Greenfield.
Well I think that you are going to we don't want to really say what percentage are up is which but I think it's going to be a.
Combination most of the square footage will be greenfield.
But where we see an opportunity were far more if it's better than a current banner were going to make that conversion and I think that.
I think that the only thing constraining us from even higher growth and farm boy is to make sure that they can handle that kind of growth and there's a certain number of stores in the next couple of years that we wouldn't go over because we just want them to get their feet under them.
At the same time I think that there are more opportunities should far way ready for them to greenfield more stores, maybe faster than we had originally thought when we made the acquisition and there are probably a few more stores that could be converted.
Especially in the.
Densest parts of Toronto.
That we're going to go forward with.
And then just on the fresh go banner.
How did I know you may not want to speak to this but how did the chello fresh close work in British Columbia versus say the normal fresh colors.
The the shallow that we've opened a couple of we've opened in Western Canada are are it's hard to say among the strongest because we've only open to a handful of stores, but if if we're happy with the fresh goes were extra happy with the channels.
I think they're very I think our fresco offering overall is differentiated and our channels, even more differentiated in that market.
Please stand out even more they wouldn't Ontario, and so in fact, we are just talking about that today, how im pleased with the channel.
In Ontario and in in the West.
Thank you.
Thank you.
Thank you there are no further questions I will now turn the call back over to Citibank for closing remarks.
Thank you Joanna.
Ladies and gentlemen, we appreciate your continued interest in Empire. If there any unanswered questions. Please contact me my phone or email.
We look forward to having you join us for our second quarter fiscal 2020 conference call on December 12 toxin.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.